This Boeing 787 Is Just the Beginning for Air Canada

As Air Canada takes delivery of its first Dreamliner, it's clear there's more than new planes to come.

May 14, 2014 at 11:35AM

Although it's been nine years in the making, Air Canada (TSX:AC.B) is finally getting ready for its first Boeing (NYSE:BA) 787 Dreamliner to be delivered. The new plane is expected to provide numerous advantages for Air Canada, but perhaps more importantly, the 787 is just one aspect of a big change at the airline.

Dreamliner gains
This Boeing 787 marks the first delivery of 37 Dreamliners Air Canada has on order, an order that is valued at around $6 billion. For passengers, the airline touts increased flight comfort and features on a dedicated Air Canada 787 website. But shareholders see economic benefits as well.

Thanks to a host of improvements including improved aerodynamics and the use of composite materials, the Boeing 787 uses about 20% less fuel than similar aircraft. For fuel-guzzling airlines, the money saved on fuel goes a long way toward reducing unit costs. So it's no surprise that the Dreamliner has seen over 1,000 orders as airlines look to both improve the passenger experience and cut costs.

As Air Canada takes delivery of its Boeing 787s, it plans to use many of them on routes currently operated by less economical Boeing 767 aircraft. Among the first routes to see 787 service will be Toronto to Tokyo Haneda and Toronto to Tel Aviv, both routes where fuel savings and aircraft configuration will benefit Air Canada.

What about the 767?
As Air Canada continues to take delivery of Dreamliners over the next several years, a lot of the airline's 767 aircraft will be replaced. But Air Canada has come up with an interesting way to get the most out of the older planes. While the 767 aircraft are not economical for Air Canada, they could still be for a low-cost carrier.

But instead of selling the 767s to a rival carrier, Air Canada created its own low-cost subsidiary airline, Air Canada Rouge. This subsidiary carrier will allow Air Canada to expand to fly previously unprofitable routes that now have been made economical under an improved cost structure. As mainline Air Canada continues to receive Dreamliners, the Air Canada Rouge fleet can expand, allowing it to service additional routes.

More fleet modernization
Through the depths of the recession, Air Canada was burning cash and focused on maintaining its solvency. But with profits flowing again, the airline is looking to cut fuel costs and improve the passenger experience with more modern aircraft.

Last month, Air Canada finalized its order for 61 Boeing 737 MAX aircraft to upgrade its narrow-body fleet. The move follows a broader fleet modernization trend and made an important statement to the aerospace manufacturing industry.

By opting for the 737 MAX, Air Canada is ending the dominance by Airbus Group (NASDAQOTH:EADSY) in its narrow-body fleet. There is also intense competition in the battle for the long-anticipated regional jet order from Air Canada, which is expected as the airline seeks fleet modernization in all parts of its fleet.

Modernizing Air Canada
The Boeing 787 is the biggest story at Air Canada right now because the aircraft are expected to cut costs and give the airline a better passenger experience to sell. But the Dreamliners are also enabling Canada's flag carrier to grow a new, low-cost subsidiary while finding a home for the Boeing 767 aircraft currently serving mainline Air Canada.

Over the next few years, investors can expect Air Canada's fleet to see significant changes. With earnings increasing, costs decreasing, and a plan for growth ahead, Air Canada is definitely worth a look for airline investors.

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Alexander MacLennan owns shares of Air Canada. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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